Understanding Transfer Pricing and Its Growing Importance in the UAE with the Introduction of Corporate Tax
With the formal introduction of corporate tax in the UAE effective from June 2023, the business landscape has witnessed a significant shift—particularly for multinational enterprises (MNEs). Among the various tax compliance components that businesses now need to consider, transfer pricing (TP) has emerged as one of the most critical.
Transfer pricing refers to the pricing of transactions between related parties—companies that are part of the same group but operate in different tax jurisdictions. These transactions can include the sale or transfer of goods, services, intellectual property, loans, or other financial arrangements.
Globally, transfer pricing has always been a focus area for tax authorities due to the risk of profit shifting—where businesses move profits to low-tax jurisdictions to reduce their overall tax burden. With the UAE aligning itself more closely with international tax standards, particularly the OECD’s Base Erosion and Profit Shifting (BEPS) framework, transfer pricing has now become a central requirement for tax compliance in the country.
What is Transfer Pricing?
Transfer pricing is essentially the price at which controlled transactions (transactions between related parties) are conducted. Unlike transactions between unrelated parties, which are naturally governed by market forces, related party transactions may be structured to serve internal group strategies, including tax planning.
To counteract this, the Arm’s Length Principle (ALP) was introduced. Under this principle, the prices charged in intercompany transactions must be the same as those that would have been charged if the parties were unrelated and operating in the open market.
Why Transfer Pricing Matters in the UAE
1. Introduction of Corporate Tax
Prior to 2023, the UAE’s federal government did not impose corporate income tax on most business sectors (excluding certain oil, gas, and banking entities). However, with the rollout of a 9% federal corporate tax on business profits exceeding AED 375,000, a new era of tax governance has begun.
For multinational companies operating in the UAE—especially those engaging in cross-border transactions with their group entities—transfer pricing is now a mandatory compliance area. This means companies must justify that their intercompany dealings are conducted at arm’s length and not structured to shift profits unfairly.
2. Alignment with OECD Guidelines
The UAE has committed to implementing the OECD’s BEPS Action Plan, particularly Action 13, which pertains to transfer pricing documentation and transparency. This includes:
Master File: An overview of the entire multinational group’s business operations, global allocation of income, and TP policies.
Local File: A detailed report of intercompany transactions conducted by the UAE entity, including pricing, contractual terms, and justifications for applied transfer prices.
Country-by-Country Reporting (CbCR): For groups with global revenues exceeding AED 3.15 billion, a report summarizing key financials and tax data for each jurisdiction in which they operate.
This shift ensures that the UAE remains compliant with global tax transparency requirements and continues to uphold its reputation as a credible business hub.
Risks of Non-Compliance
Non-compliance with transfer pricing requirements can have serious consequences, including:
Fines and penalties imposed by the Federal Tax Authority (FTA) for inaccurate or incomplete reporting.
Transfer pricing adjustments that could increase a company’s taxable income and result in higher tax liabilities.
Audit risks, especially for businesses that do not maintain proper documentation.
Reputational damage, particularly for multinationals under increasing scrutiny from both regulators and the public.
With these risks in mind, businesses must treat transfer pricing not merely as a compliance exercise, but as a critical component of their tax and financial strategy.
Key Areas Where Transfer Pricing Applies
Transfer pricing impacts a wide range of intercompany transactions, including:
Goods and Inventory Transfers: The sale of finished or raw materials between entities within the group.
Service Agreements: Shared service centers, management fees, or administrative support provided across subsidiaries.
Royalty and Licensing: Payments for the use of intellectual property, brand names, or technology.
Financial Transactions: Intercompany loans, guarantees, and treasury operations.
Cost-Sharing Arrangements: Allocation of R&D or marketing expenses among group entities.
Every transaction type requires a tailored pricing method and documentation to support compliance with the arm’s length standard.
Steps to Ensure Transfer Pricing Compliance in the UAE
To stay compliant and manage risk effectively, businesses should adopt a structured transfer pricing approach:
1. Conduct a Functional and Risk Analysis
Understand the roles, responsibilities, and risks borne by each related entity in the group. This helps determine what each entity contributes and how profits should be distributed.
2. Choose an Appropriate Transfer Pricing Method
Common OECD-recognized methods include:
Comparable Uncontrolled Price (CUP)
Resale Price Method
Cost Plus Method
Transactional Net Margin Method (TNMM)
Profit Split Method
The method chosen should reflect the nature of the transaction and availability of reliable data.
3. Maintain Proper Documentation
Prepare and retain Master Files, Local Files, and other supporting documents demonstrating that your company’s pricing policies are consistent with the arm’s length principle.
4. Regularly Review and Update
As business models evolve, transfer pricing policies must be updated accordingly to reflect new risks, market conditions, and operational changes.
5. Engage Professional Support
Given the complexity and technical depth of transfer pricing, it is advisable to engage professionals who specialize in this area—especially those familiar with UAE regulatory frameworks and international best practices.
How Pente & Lumen Can Help
At Pente & Lumen, we understand the growing significance of transfer pricing in the UAE’s tax environment. Our team of experienced consultants helps businesses navigate the complexities of TP regulations and ensures they remain fully compliant with local laws and global standards.
Our services include:
Transfer Pricing Policy Development: Designing arm’s length pricing strategies for intercompany transactions.
Documentation Support: Preparing Master Files and Local Files as required by the UAE’s corporate tax regulations.
Benchmarking Studies: Conducting economic analyses to justify transfer pricing policies.
CbCR Assistance: Helping large MNEs meet their country-by-country reporting obligations.
Audit Support: Representing clients during FTA reviews or audits and assisting in dispute resolution.
Training & Advisory: Equipping in-house teams with the knowledge and tools to manage TP risks effectively.
We tailor our solutions based on the specific structure, industry, and objectives of each client—ensuring compliance while also aligning with broader financial goals.
Conclusion
As the UAE integrates into the global tax framework, transfer pricing has become a key compliance requirement—especially for businesses engaged in cross-border or intercompany transactions. With the introduction of corporate tax, companies can no longer afford to overlook the strategic and regulatory importance of properly managing their transfer pricing policies.
Pente & Lumen is here to ensure that your business not only complies with the latest requirements but also builds a strong foundation for sustainable and transparent growth. With our guidance, you can turn transfer pricing from a risk into a competitive advantage.
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